Still a Lot of Fight Left in THQ

Video game publisher THQ Inc. is relying on a five-point strategy to carry the company through a time of plunging consumer confidence, dropping sales and overall economic morass. The maker of such popular titles as “Saints Row” and games featuring Pixar and Nickelodeon characters may be on the ropes but it has plans to pick itself up and remain a force in the gaming industry by releasing fewer titles, making gains in the children and family markets, having a greater online presence, and dominating the fighting game category. In addition, the Agoura Hills-based company is cutting $100 million from its production budget and $20 million in administrative and sales costs in fiscal 2010. Five design studios in the U.S. and Europe were closed earlier this month and staff reductions were made at two other studios making for 250 layoffs. What these moves do is make for a smaller and more focused game portfolio that is in sync with the consumer trends in the gaming industry, company officials said. The biggest change is paring down the core gamer titles from 3 to 4 a year to 1 or 2 a year. These are the games with the most investment to them and get the splashy launches, such as with the second installment in the “Saints Row” franchise. “It is back to basics,” said company CEO Brian Farrell. “We know how to do this and it’s just focusing on it and doing it right.” Shares in THQ closed at $4.03 on Nov. 18. For the quarter ending Sept. 30, THQ reported a net loss of $115.3 million, or $1.73 per diluted share, on revenues of $164.8 million. For the same period a year ago, the company had a net loss of $7 million, or $0.11 per diluted share, on revenues of $229.3 million. The woes faced by THQ come at a time when overall video games sales are expected to hit a record in 2008. Market research firm The NPD Group forecasts sales in the $22 billion to $23 billion range. In 2007, sales reached $18 million, the firm said. Sales, however, are down for THQ, an indication that some of the game titles were not the big sellers the company had hoped for. From now on, a more selective process is in place to determine what games move from the idea stage to getting into the game consoles, PCs and portable devices of players. Other game makers are not feeling the effects of slow sales. Los Angeles-based Activision Blizzard expects continued high sales this year of its best-selling “Guitar Hero” franchise and its executives stated in a recent analyst call that retailers are allocating up to 40 percent more in-store space to the videogame category, according to Warren’s Consumer Electronics Daily. On the other hand, Electronic Arts, whose titles include “Rock Band,” “The Sims,” and “Madden NFL,” has embarked on its own restructuring plans that will cut 6 percent of its workforce. Other major game makers have also closed studios. “Any smart company is going to look at its core business to decide what is strong and what isn’t and where they should focus,” said David Riley, a director with the NPD Group which tracks the video game industry. Given THQ’s financial condition it is not much of a stretch to speculate if the company could be an acquisition target. The economies of scale needed to be competitive in the industry are such that a large amount of capital is needed to go after a top echelon game maker like THQ, said Joseph Olin, president of the Academy of Interactive Arts & Sciences, a professional association for the gaming industry based in Calabasas. (THQ has a representative on the academy’s board.) A takeover could be tempting to a large media company which does not have a large footprint in video games, added Simon Carless, publisher of Gamasutra.com, a gaming industry online publication. “There are always possibilities for consolidation but there are other obvious targets like Midway (Games, based in Chicago) that are not doing well,” Carless said. Tracking trouble While recent comments by Farrell to investors and analysts have focused on the down economy and lack of consumer confidence, slumping sales and net losses can be tracked back at least a year. Last November, the company had to restate its revenue guidance for the full 2008 fiscal year when sales of its racing games “Stuntman: Ignition” and “Juiced 2: Hot Import Nights” did not meet expectations. Two other titles were delayed for release until fiscal 2009. Then in January, a 17 percent decrease in sales was forecast for the fourth quarter of fiscal 2008 due to one canceled Playstation 2 game and lowered expectations for several other titles. The five-point strategy dates back about a year and what the company is doing now is refining that strategy, Farrell said, and letting the investment community know in the most clear and direct way what the plan is for a financial turnaround. A dependence on coming up with the next million selling game title faced by all gaming companies is what led to the four-stage greenlight process that boils down to many ideas being considered but only a small few making it to the development stage. That way investment stays low until it can be determined that a game has tested well both inside and outside the company and has a potential market, Farrell said. The core titles making it to store shelves will be a mix of brand new titles and continuations of existing franchises. Popularity of franchises The gaming industry finds itself in the same position as the film industry in that franchise content costs less to market when compared to attracting audiences to unfamiliar characters. Top sellers from THQ include the WWE vs. Raw franchise, “Cars,” based on the Pixar film, and “Red Faction: Guerilla.” New licenses include a deal with Marvel for games based on its iconic characters; and with DreamWorks Animation for a superhero-themed game based on its 2010 release “Master Mind.” THQ has done well with some of its children and family titles and with creating original games such as “Saints Row” but stumbled with the “Stuntman” franchise, said Gamasutra’s Carless. “I think “Destroy All Humans” has done well but is not a massive holiday franchise,” Carless said. Pulling back from core gamer titles is in recognition of a market shift toward casual players who might not otherwise pick up a console controller or go online to play. In September, THQ started a joint venture with ICE Entertainment in Shanghai to bring the free, massively multiplayer online casual game “Dragonica” to the North American market in 2009. “Brian and THQ are in a position where it is easier for them to make a change like that and consolidate and say ‘there are these targets we have great assets for let’s go focus on them’ than perhaps some of the other companies,” said Olin, of the AIAS. The business model for developing games for families and casual gamers works as it is relatively inexpensive, Farrell said. “Da Blob” and “All Star Cheer Squad” have been popular titles in that segment. “Big Beach Sports” sold over 1 million units. “The cost versus revenue is very attractive,” Farrell said.